Friday, April 1, 2011

CARRY TRADE

'CARRY TRADE''  is a common theme in conversations this week....re the
USDJPY move and FED speakers..
We've seen CHF weaker this am , albeit on light flow, EURCHF taking out prev
resistance at 1.3040.

Take a quick look at this brief  piece from David Bloom this morning.
Highlights his thoughts on whats going on in this space at mom...

Cheers

Al
THE G7 INTERVENTION HAS HAD UNINTENDED CONSEQUENCES.BY LIMITING THE DOWNSIDE
FOR USD-JPY AND CREATING UNLIMITED POTENTIAL UPSIDE. IT HAS ENCOURAGED THE
RETURN OF THE YEN CARRY TRADE...RISKING INSTABILITY RATHER THAN STABILITY
FX Strategy
{http://bit.ly/fzkR8O}

G7 co-ordinated intervention has effectively removed the JPY from the normal
currency landscape.

In the wake of the intervention, volatility in USD-JPY has fallen and should
continue to do so. The USD-JPY is already back above pre-disaster levels and
there is increasing appetite to buy the carry favourites.

The intervention is offering downside protection on USD-JPY, and suppressed
volatility. Carry currencies such as AUD, BRL,TRY, and ZAR are all now
benefiting.

This has distorting consequences for the CHF as well. If the market turns
risk averse the JPY no longer offers a safety valve. This leaves the much
less liquid CHF at the mercy of those looking for safety. So suppressing
volatility in the JPY could cause increased volatility in the CHF.


INSTABILITY OUT OF STABILITY

In essence the idea of creating "stability" in the FX markets sows the seeds
of instability. It creates an artificial FX "level" that allows investors to
take risks and positions they might not have otherwise taken. That means the
JPY is unable to trade at an equilibrium level and is kept at an artificial
level. So in essence the G7 co-ordination will lead to unintended
consequences of a
strong CHF in a "risk off" environment and a stronger AUD, ZAR, TRY and BRL
in a "risk on" environment.

As usual with these carry trades, they will work brilliantly for a time and
then unravel very quickly. As always with the carry trade it is up the
stairs and down the elevator.

The unintended consequences of the G7 intervention are a major theme for now
- until of course the end of QE2 becomes dominant.

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